How to Transfer Ownership in an Existing Business
While small business owners are well known for their attention to detail when crafting their initial business plans, almost no business is built with plans for transferring ownership. While the steps to building a strong business are often intuitive to an owner, transferring that ownership to new custodians isn’t nearly as cut-and-dry. No matter if for retirement or new horizons, transferring your business must be handled as deftly as when it was first acquired or created. There are several nuances to business ownership transfer that may not be immediately apparent even to the savviest business owner; but if missed, this could spell catastrophe later. The most effective transfers are seamless and well-managed. Follow this guide to learn the types of business transfers and the steps between first meetings and passing on the keys.
Types of Business Transfers
An outright sale is as simple as business transfers can be. An outright sale means that an interested party and a business owner make an agreement to fully transfer ownership of the business after a signed agreement and often an exchange of capital or stock. Importantly, outright sales traditionally mean that the former business owner then has absolutely no influence on the future of the business; for this reason, outright sales are often a great choice for retirees or underperforming businesses of which the owners would like to wash their hands.
A gradual sale is a financing agreement between a business owner and an interested party where daily operations of the business in question are transferred over to the new party while the owner receives some income from their former business for a predetermined amount of time. Gradual sales agreements often have far less capital or stock exchange on the actual day of sale but tend to pay out more to the former owner than lump sums from outright sales. Gradual sales are great options for would-be buyers who don’t have the liquid for an outright sale but see promise in the business they are acquiring.
In business lease agreements, the former business owner still owns their business while the signing party runs day to day operations and makes regular payments to that owner. Lease agreements are great for business owners that cannot run daily operations but aren’t certain if they want to sell their business outright. Unlike a gradual sale which ends with the original owner no longer owning the business, that isn’t necessarily the case with lease agreements. Depending on the terms of a lease agreement, former owners may petition to reinstate their ownership if they are unhappy with the new custodians.
Transfer by Bequest or Gift
Business owners can name someone to receive their business in their will or before they die as a gift. For businesses transferred by bequest, all business assets beyond $5 million are subject to tax. There are tax implications with transfers and bequests – and the Biden administration is aiming for significant changes to exemption limits and tax rates so be sure to fully research and understand the tax consequences of passing along your business as a gift.
Consult an Attorney
Before talking numbers with any potential buyers, or moving forward with gifting your business, it is highly recommended that business owners talk to an attorney regarding their succession plan. A company transfer is as much a legal process as a business process. Attorneys are acutely aware of regulatory requirements for business transfers (which can vary wildly between states) and can be a lifesaver when drafting your agreements.
Seek a Business Valuation
Seek out a 3rd party valuation firm before talking to any buyers. Even if you do not go through with a sale, having a relevant valuation of your business can be supremely helpful for future financing or structure changes.
Beyond the valuation itself, be sure to consider the full extent of your business’s “Goodwill” which includes the value of your assets, your current customer base, as well as your existing reputation. These figures ought to all be included when determining an asking price for your business.
Prepare Your Purchase Agreement
Your Purchase Agreement is a legally binding contract that includes all elements of your impending sale. It is essential that if you have not already spoken to an attorney that you do at this point. Be certain that your Purchase Agreement touches on these concepts:
Description of Your Business: It may sound superfluous, but superfluous-ness is unavoidable in legal documents. You must state in certain terms what your business wholly is. Your business includes its location, products or services rendered, management structure, target customers, distribution strategies, financial history, as well as certification that you have the legal authority to sell your business, i.e., notarized deed or articles of incorporation.
Details of the Sale: This section will specify if the business transfer is via outright sale, gradual sale, lease, or potentially gift or bequest. Beyond the basic terms of the sale, this section should also list in concrete terms exactly what assets, like machinery, real estate, and staff, will be transferred in addition to the business itself.
Covenants: Depending on the type of agreement you strike with potential buyers, you, the business owner, may be responsible for certain financial obligations like existing loans, outstanding tax requirements, or any employee-related financial duties like benefits or salaries. Covenants also include any non-compete clauses, non-disclosure agreements, or indemnification agreements made alongside your transfer.
Inform Vendors, Customers, Employees, and the IRS
It is a well-respected professional courtesy to notify all of your contacting businesses and even customers about your impending change of ownership. While it is simply a kind gesture of thanks to your former customers and welcoming the new ownership, contacting vendors and suppliers is likely more important, as existing contracts will need to be amended to reflect your business’s new ownership.
It is essential, however, that you fully brief your employees and the IRS about your business transfer. Any existing contracts with vendors or suppliers will very likely need to be amended because of your business’s new ownership, so be certain to send electronic or postal notices to those relevant businesses before you finalize the transfer. As for the IRS, be certain your EIN (Employee Identification Number) is properly terminated at the time of your business transfer. Even if the new owners plan to keep the name of your business the same, they must apply for a new one or use their existing EIN to operate.
Saying Goodbye to Your Business
Regardless of the reason for your exit, transferring ownership of your business is a monumental step, often signifying a new life chapter. Like the owners who run them, every business transfer is unique. While this general guide tunes into the key, universal steps in the transfer process, almost every industry has their own caveats. When wading your way through regulatory legalese, it never hurts to have an extra set of eyes overlooking your transfer. Keep trusted employees and close mentors in the loop of your transfer and you are much more likely to walk away with a satisfactory contract and deal.